HELOC Repossession : Why You Should Protect Your "Insurance Policy"

As home values stagnate around the country, mortgage lenders are actively trimming their exposure to home equity.  Until recently, they've done it one of two ways:

1. They eliminated no downpayment loans (except in rare circumstances)
2. They capped second mortgages (i.e. home equity loans) at 95% of the home's value

But now, there's a third way. 

To reduce exposure to the national housing market, banks are now shutting down idle home equity lines of credit on their books.  The letter above arrived in my mailbox, for example, a few weeks back. 

A HELOC is the ultimate emergency fund for a homeowner and a receiving a letter like this makes it look like the bank is doing you a favor.  It's not.

For homeowners, a home equity line of credit can be smart addition to a short- and long-term financial plan.

• It's instant access to your home's equity
• There's no payments unless you're using it
• The interest rates can be up to 15 percent lower than on credit cards

Because of these traits, home equity lines of credit are the perfect tool for when a life throws you a curveball -- and life always does. 

After all, when you need money, nobody wants to lend it to you.  Banks don't like the idea of loans to people in crisis.  Banks prefer lending to "good risks".

As an insurance policy of sorts, a HELOC is really your "loan in advance"; it's money set aside and available to you for when you need it most.  And, until recently, once you had a home equity line of credit in place, nobody was taking it away from you. 

That's all changing now.  Let's look at the letter line-by-line:

• Lines 1-2: You have a HELOC and aren't using it
• Lines 3-4: We'll waive your early exit penalty if you close your HELOC now
• Lines 4-6: Closing your HELOC will lower your total debt load with credit agencies
• Lines 7-8: We'll make it easy -- do nothing and we'll close your HELOC for you
• Lines 8-12: To keep your HELOC open, write a letter and mail it to us

The letter from the lender above is sinister, in some respects. 

First, a layperson would infer from Lines 4-6 that his credit score would improve if the HELOC is shut down.  That's not true. 

Second, the lender is closing the HELOC by default, requiring the homeowner to handwrite a letter, stamp it, and mail it in order to keep the credit line open.  There was no pre-addressed return envelope in the original letter.   

The lender misdirects the homeowner and then creates hoops for him to jump through.

Mortgage lenders are sending letters like this one to homeowners around the country.  If you get one, take the time to write the lender back.  Leave your inactive HELOC open and available for emergencies. 

In the current lending climate, it's a lot easier to keep your existing HELOC than it is to get a new one.

(Image courtesy: Oxford Academy Gameday)